In the presence of a positive externality in consumption, deadweight loss is best described as:

• A. The welfare gain from underconsumption
• B. The welfare gain from overconsumption
• C. The welfare loss from underproduction relative to the social optimum
• D. The welfare loss from overproduction relative to the social optimum

Answer: (C)

When a good has a positive externality in consumption, the total benefit to society from each additional unit is higher than the private benefit received by the consumer, because others also gain from that consumption. Since individuals don’t take these external benefits into account, they consume less than is socially optimal. The social optimum occurs where the social marginal benefit (private benefit plus external benefit) equals marginal cost, but the market equilibrium is where private marginal benefit equals marginal cost. Because the social benefit curve lies above the private one, the market quantity is too low. The deadweight loss here is the welfare loss from underproduction relative to the social optimum—the lost total surplus from not producing and consuming enough units to maximize society’s total benefits. The other options describe gains or overproduction, which do not fit a scenario with a positive externality in consumption.